Stocks close lower as government shutdown looms, but log solid gains for September and Q3

Stocks finished sharply lower Monday, as the budget impasse in Washington threatened the first government shutdown in nearly 17 years, but major indexes still capped a rocky month and quarter with robust gains.

The Dow Jones Industrial Average slumped 128.57 points, to close at 15,129.67, dragged by P&G and United Tech. The blue-chip index has dropped for the seventh day in eighth.

The S&P 500 declined 10.20 points to finish at 1,681.55. And the Nasdaq fell 10.12 points to end at 3,771.48.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, jumped near 17.

All key S&P sectors closed in the red, dragged by consumer staples and energy.

For the month, the Dow rallied 2.16 percent, the S&P 500 jumped 2.97 percent, and the Nasdaq soared 5.06 percent. And for the third quarter, the Dow rose 1.48 percent, the S&P rallied 4.69 percent, while the Nasdaq spiked up 10.82 percent.

In a 54 to 46 vote, the Senate stripped provisions that would have delayed the implementation of Obamacare by a year, and instead sent an emergency spending bill to the House, where its fate is uncertain.

Last week, major averages logged their first weekly drop since August with investors nervous over a potential shutdown.

"Just as one arguing couple can ruin a large dinner party, the sight of a dysfunctional political process is an unwelcomed development for investor confidence in stocks," wrote Nicholas Colas, chief market strategist at ConvergEx Group. "If and when a government shutdown starts, the clock will start ticking on lower GDP growth rates and reductions in corporate earnings."

Discussing today's market action amid a potential government shutdown, and where the best market opportunities are, with Susan Fulton, FBB Capital Partners, and Peter Boockvar, The Lindsey Group.

On the economic front, he pace of business activity in the U.S. Midwest increased to 55.7 in September from 53.0 in August, according to the Institute for Supply Management-Chicago. A reading above 50 indicates expansion in the regional economy.

Paychex is the only notable company scheduled to post earnings after the closing bell.

Interbrand's annual Global Brands report ranked Apple as the most valuable for the first time, displacing perennial number one Coca-Cola.

Disappointing economic data from China also sapped investors' appetite for risk. China's final reading of manufacturing activity from HSBC came in at 50.2 in September, lower from a preliminary reading of 51.2 earlier this month. Still, the data was higher from August's 50.1 reading. The Chinese Shanghai Composite outperformed as the region's sole gainer, while Japan's Nikkei index closed down 2 percent.

"This is as good as it gets for the time being. The data reflects the stimulus over the summer but don't expect too sharp an acceleration from here," said Frederic Neumann, co-head of Asian economic research at HSBC.

The pan-European FTSEurofirst 300 closed in the red and the Italian blue-chip FTSE MIB index dropped approximately 1.5 percent, suffering its worst session in nearly six weeks.